Fact Sheet Intellectual Property Valuation

Transcription

1 European IPR Helpdesk Fact Sheet Intellectual Property Valuation The European IPR Helpdesk is managed by the European Commission s Executive Agency for Competitiveness and Innovation (EACI), with policy guidance provided by the European Commission s Enterprise & Industry Directorate-General. The opinions expressed are those of the authors and do not necessarily reflect the views of the European Commission. June Why you should care about valuation of intellectual property Who should be involved in the valuation How is valuation performed? Quantitative approach Cost-based Market-based Income-based Option-based Qualitative approach Selecting the right... 8 Introduction Intellectual property assets such as patents, trade marks or copyrights are increasingly the core of many organisations and transactions. Licensing and assignments of intellectual property rights have become common in the market, and the use of these types of asset as loan security has grown. This new reality has given rise to the growing importance of valuation of intangibles. Trading an asset requires knowing its value. Several ologies are commonly used in the market to value these assets. In this fact sheet, the different ologies will be explained and examples of European IPR Helpdesk

2 scenarios of possible use of these ologies are given. Different tools have been created by public organisations to assist companies performing valuations. These free tools will also be presented in this document to help you save time and money. 1 Why you should care about valuation of intellectual property Valuation of intellectual property rights is part of the good management of intellectual property within an organisation. Indeed, knowing the economic value and importance of the intellectual property rights you create and develop assists in the strategic decisions to be taken on the assets, but also facilitates the commercialisation and transactions concerning intellectual property rights. There are many business situations where valuation is required: 1 a) Valuation of a company for the purposes of a merger, acquisition, joint venture or bankruptcy. Companies are increasingly based on intangible assets and investment in knowledge. Indeed, according to studies, expenditures on knowledge, through investments in R&D or software, have grown at a higher rate than expenditures in tangibles. 2 This change in investments has consequently been reflected by a heavy importance of intangible assets in companies. Therefore, to know the value of companies it is essential to know the value of their intellectual property. b) Negotiations to sell or license intellectual property rights. As in other business transactions, organisations negotiating agreements to sell or licence intellectual property rights commonly have to agree on a price. Knowing the value of the intellectual property right is essential to reach such an agreement, but also to make sure the parties are engaging in a good deal. c) Support in situations of conflict, such as court proceedings or alternative dispute resolution mechanisms (such as arbitration). In scenarios of conflict, quantification of damages is often a necessary step of the process. The correct valuation of the intellectual property right at stake is therefore essential to guarantee a fair recovery of the damages. 1 IP4inno Study, Valuation of Intellectual Property. 2 Creating Value from Intellectual Assets, Policy Brief, Organisation for Economic Co-Operation and Development (OECD),

3 d) Fund raising through bank loans or venture capital. Valuation of the intellectual property to be used as security for bank loans or to attract venture capital and investors is essential. Indeed, several studies reveal that, in particular, owning patents and a proper IP management play a crucial role in the decision of venture capitalists. 3 e) Assisting internal decision making. Valuation also plays a role on decisions concerning the patenting strategies and country selection for registration of intellectual property rights, or can assist organisations to identify weaknesses such as ownership uncertainties that have an impact in the value of the intellectual property rights and on decisions for the exploitation of such assets. f) For accounting and taxation purposes. Organisations are required to report on their assets, including their intangible assets. Valuation is therefore a necessary step, as well as in situations of tax planning involving intellectual property. Defining the objectives and context of the valuation is essential, since it determines the strategy as well as the type of valuation (s) that should be used. This is therefore the first step to take when performing a valuation. 2 Who should be involved in the valuation Valuation of intellectual property can be performed in-house or outsourced to a professional entity. If performing it in-house, organisations must be aware that this should be a team effort, involving several staff members with legal, technical, financial, marketing and strategic expertise. Tip: if engaging with the services of an external entity to perform the valuation of your intellectual property, do not forget to have confidentiality obligations in place to protect your business information. To assist in particular SMEs performing basic valuation in-house, several national intellectual property offices in the European Union and other public organisations have created free tools, such as the following: 3 Kamiyama, S., J. Sheehan and C. Martinez (2006), Valuation and Exploitation of Intellectual Property, OECD Science, Technology and Industry Working Papers, 2006/085, OECD Publishing. 3

4 IPscore IPscore is a unique evaluation tool of the European Patent Office (EPO) developed to provide a comprehensive evaluation of patents and technological development projects. It is a simple, user-friendly tool that can be used by all companies that have a portfolio of patents and development projects. 4 It provides: a basis for identifying the conditions that create value for the patent or development project. A strong evaluation profile, with tried and tested assessment factors and new reports, provides a comprehensive evaluation of the various conditions determining the value of a patent or development project. a basis for assessment and valuation of the patent or development project. A quantitative financial module works out a financial forecast and thereby determines the financial order of magnitude in the overall qualitative evaluation. IP Tradeportal The Danish Patent and Trademark Office has developed a portal with the purpose of helping businesses to better exploit their knowledge by trading their intellectual property rights. On the portal page you can find a set of tools for trading rights, including on valuation. 5 IP Panorama IP PANORAMA was developed jointly by the Korean Intellectual Property Office (KIPO), the Korea Invention Promotion Association (KIPA), and the World Intellectual Property Organization (WIPO). It consists of a set of e-learning modules, one of them dedicated to valuation of intellectual property assets. 6 IP Healthcheck As part of the IP Healthcheck series, the UK Intellectual Property Office has published a booklet on Agreeing a price for intellectual property rights to help companies on the valuation of their intellectual property assets in the context of business transactions. 7 4 This tool applies a qualitative approach. Further information on this valuation is provided in part 3 of this fact sheet. To know more about IPscore, we suggest you to check our Bulletin number 8, January to March 2013, which is available in our online library. 5 The IP Tradeportal is available at the Danish Patent and Trademark Office: 6 The IP Panorama e-learning modules are available at WIPO s website: 7 The booklet Agreeing a price for intellectual property rights is available in the UK IPO website at: 4

5 3 How is valuation performed? Different approaches of intellectual property valuation are used by organisations. Generally, these approaches are divided in two categories: the quantitative and qualitative valuation. While the quantitative approach relies on numerical and measurable data with the purpose to calculate the economic value of the intellectual property, the qualitative approach is focused on the analysis of the characteristics (such as the legal strength of the patent) and uses of the intellectual property. 8 Several ologies are used on the quantitative approach, but generally they can be grouped in four s: 9 1. cost-based ; 2. market-based ; 3. income-based ; and 4. option-based. Valuation QUANTITATIVE APPROACH QUALITATIVE APPROACH Cost-based Market-based Income-based Option-based Qualitative 3.1 Quantitative approach Cost-based This is based on the principle that there is a direct relation between the costs expended in the development of the intellectual property and its economic value. 8 Lagrost, C., D. Martin, C. Dubois and S. Quazzotti (2010), Intellectual property valuation: how to approach the selection of an appropriate valuation, Journal of Intellectual Capital, vol. 11 n. 4, Emerald Group Publishing Limited. 9 Flignor, P., D. Orozco Intangible Asset & Intellectual Property Valuation: A Multidisciplinary Perspective,

6 Different techniques are used to measure costs: i. Reproduction cost : Estimations are performed by gathering all costs associated with the purchase or development of a replica of the intellectual property under valuation. ii. Replacement cost : Estimations are performed on the basis of the costs that would be spent to obtain an equivalent IP asset with similar use or function. In both s we take today s price into account, i.e. the expenditures as of the valuation date and not the historical costs when these actually happened. 10 Costs of two sorts should be included: a) Direct expenditures, such as costs with materials, labour and management; and b) Opportunity costs, relating to the lost profits due to delays in market entrance or investment opportunities lost with the aim of developing the asset Market-based The market-based valuation relies on the estimation of value based on similar market transactions (e.g. similar licence agreements) of comparable intellectual property rights. Given that often the asset under valuation is unique, the comparison is performed in terms of utility, technological specificity and property, having also in consideration the perception of the asset by the market. Data on comparable or similar transactions may be accessed in the following sources: a) company annual reports; b) specialised online databases such as: Royalty Source Intellectual Property Valuation and Licensing: Recap: PharmaVentures: Royaltystat: Knowledge Express: Intellectual Property Research Associates: Royalty Connection: ktmine: etc. 10 Drews, D., The Cost Approach to IP Valuation: Its Uses and Limitations, IP Metrics Intellectual Property Valuation, See footnote 10. 6

7 c) in publications dedicated to licensing and royalties such as the Licensing Economics Review; d) in court decisions concerning damages Income-based This is based on the principle that the value of an asset is intrinsic to the (expected) income flows it generates. After the income is estimated, the result is discounted by an appropriate discount factor with the objective to adjust it to the present circumstances and therefore to determine the present value of the intellectual property. There are different s of calculation of the future cash flows, such as: i. Discounted cash flow : This aims to estimate future cash flows, which are projected and after discounted by applying an appropriate discount factor. The main source of information to estimate the cash flows is generally the business plan of the company that exploits or intends to exploit the asset. ii. Relief-from-royalty : In this the value of the asset is considered as the value of the royalty payments from which the company is relieved due to its ownership of the asset. Hence, the appropriate royalty rate must be determined, allowing the estimation of the future royalty income stream. A discount rate is applied to determine the present value of the asset Option-based Differently from the other s, the option ology takes into consideration the options and opportunities related to the investment. 12 It relies on option pricing models (e.g. Black-Scholes) for stock options to achieve a valuation of a given intellectual property asset. 3.2 Qualitative approach This, also commonly referred as evaluation, does not rely on analytical data. In fact, the valuation in this is performed through the analysis of different indicators with the purpose of rating the intellectual property right, i.e. of determining its importance. The indicators cover all the aspects that can impact the value of an intellectual property asset, covering legal aspects, the technology level of the innovation, market details and company organisation. Commonly, the is implemented 12 Kamara, A., Introduction to real options, CFO Forum,

8 QUANTITATIVE through a questionnaire comprising all these different criteria. Examples of questions included in such questionnaires can be: How would you define the intellectual property innovation compared to the actual state of the art? Which level of its life cycle has the intellectual property right (e.g. patent) reached? What is the geographic coverage of the reference market? 4 Selecting the right Selecting the valuation to use in a given situation is complex. Several factors should be considered in the procedure, such as the type of intellectual property at stake, the level of development of the technology as well as the purpose of the valuation. The advantages and disadvantages of each ology should also be weighted. There is no specific rule on this matter. However, there are some situations where certain s are more likely to be used, even though in theory all s may be applied. In the table below you can see examples of scenarios where s are more likely to be used. Method when/why advantages disadvantages cost-based Valuation of an asset in the early stages of development Cases where there is no market revenue data Accounting and tax purposes Simplicity Information gathered easily since most of it is in the accounting sheets May be difficult to isolate the costs related to the intellectual property assets from the other research costs The economic benefits associated with the assets are not taken into account marketbased Valuation for internal purposes Valuation for IP transactions Valuation in litigation situations Trade mark valuation Accuracy, since it is close to market reality Objectivity May be difficult to gather comparable or similar data, since transactions are often confidential 8

9 QUALITATIVE Incomebased Valuation for fund raising Analytic May be difficult to use in high risk sectors Subjective assumptions can be made Optionbased Valuation of an asset in the early stages of development Sectors of high uncertainty Deeper analysis since it takes into account the uncertainty of potential cash-flows Complexity Qualitative Internal management decision making Simplicity Subjective Useful Resources Agreeing a price for intellectual property rights, published by the UK Intellectual Property Office IP Valuation at Research Institutes; an essential tool for technology transfer, published by the Hungarian Intellectual Property Office The use of IP valuation in IP transactions: a global survey of IP brokers, European IPR Helpdesk Bulletin n. 4 9

10 GET IN TOUCH For comments, suggestions or further information, please contact European IPR Helpdesk c/o infeurope S.A. 62, rue Charles Martel L-2134, Luxembourg Phone: Fax: istockphoto.com/dave White ABOUT THE EUROPEAN IPR HELPDESK The European IPR Helpdesk aims at raising awareness of Intellectual Property (IP) and Intellectual Property Rights (IPR) by providing information, direct advice and training on IP and IPR matters to current and potential participants of EU funded projects focusing on RTD and CIP. In addition, the European IPR Helpdesk provides IP support to EU SMEs negotiating or concluding transnational partnership agreements, especially through the Enterprise Europe Network. All services provided are free of charge. Helpline: The Helpline service answers your IP queries within three working days. Please contact us via registration on our website (www.iprhelpdesk.eu), phone or fax. Website: On our website you can find extensive information and helpful documents on different aspects of IPR and IP management, especially with regard to specific IP questions in the context of EU funded programmes. Newsletter & Bulletin: Keep track of the latest news on IP and read expert articles and case studies by subscribing to our newsletter and Bulletin. Training: We have designed a training catalogue consisting of nine different modules. If you are interested in planning a session with us, simply send us an at DISCLAIMER The content of this fact sheet cannot be considered as the European Commission s official position and neither the European Commission nor any person acting on behalf of the European Commission is responsible for the use which might be made of it. Although the European IPR Helpdesk endeavours to deliver a high level service, no guarantee can be given on the correctness or completeness of the content of this fact sheet and neither the European Commission nor the European IPR Helpdesk consortium members are responsible or may be held accountable for any loss suffered as a result of reliance upon the content of this fact sheet. Our complete disclaimer is available at European IPR Helpdesk

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